How The 2003 Arrest Of The Richest Man In Russia Changed Everything — And What Happens Next

Adam Taylor, provided by

Published 9:12 am, Saturday, October 26, 2013

Pavel Khodorkovsky was in Boston when he first heard of his father's arrest, of how masked men stormed his father's jet at dawn in the Novosibirsk Airport in Siberia, aimed machine guns at him, slapped handcuffs on his wrists, and flew him to Moscow.

He heard the news in a phone call from his mother on the morning of Oct. 25, 2003, but it would soon make headlines around the world. "Police in Russia seize oil tycoon," read The New York Times, "Russia's richest man held for fraud" went the BBC's version.

Behind the headlines, was a conflict between an oligarch who wanted to open up Russia to business and a new president, Vladimir Putin, who wanted to assert state authority. It was soon clear that the oligarch had lost.

A decade later, 28-year-old Pavel is sitting in a nondescript office in Midtown Manhattan, trying to remember what he felt after hearing the news. The office, a former storage room, is now home to a non-profit dedicated to reforming Russia, Pavel's Institute of Modern Russia (IMR).

"I was very surprised," Pavel says. "I was 18. I did not fully comprehend the gravity of what was going on and when I last spoke with my dad, he made it clear to me that there was a possibility of his arrest. But he was being so calm about it and talking openly about very high chance of landing in prison — he calmed me down. I didn’t really understand that this was going to happen in the span of the next month."

The arrest was a shock, but Pavel still assumed it would blow over. He had flights booked to Russia for the Christmas break, and he planned on using them. Within a few days, however, his father had contacted him through his lawyer. "It was a general parental order," Pavel says — don't come back until I am out of prison.

Pavel still has his ticket, but he has never returned to Russia.

Instead he has made a life in New York City, where the quiet, charming young man has gradually emerged as his father's spokesperson. It may help that he looks so much like his father, with dark, boyish features and close-cropped hair.

October 25, 2013, is the 10-year anniversary of the day that Mikhail Khodorkovsky was arrested. In that time he has not seen his son, Pavel, once. (Mikhail's three younger children from a second marriage remained in Russia and have been able to visit their father periodically).

But in less than a year — next August — Mikhail is due to be released from prison. Whether this will happen and what it means for the Khodorkovsky family, Putin, and the rest of Russia are some of the biggest questions of the year.

Mikhail was 40 years old when he was arrested, and at that time he was seen as one of the brightest stars of Russia's post-Soviet capitalism. In fact, he was one of the small number of entrepreneurs who had existed within the closing years of Russian communism, and like everything from this period, the exact nature of his rise from rags to riches to jail is murky.

Perhaps the best English-language account of how Mikhail made his money was written by David E. Hoffman, the former Moscow bureau chief for the Washington Post, in his book "The Oligarchs." First published before Mikhail's arrest, the book goes into depth about how a 20-something student began to work in some of Soviet Russia's first experiments in capitalism. Mikhail, the son of two Jewish engineers, had a modest upbringing. As a member of the Young Communist League, however, he worked out a clever way of turning the virtual, communist money that was used by factories for orders (beznalichnye) into real cash.

"Starting in 1987, he began to churn the relatively useless beznalichnye into sought-after cash and, even better, into even more valuable hard currency," Hoffman writes. "The full story, even a decade later, is a bit of a mystery, and I discovered that many of those who participated in Khodorkovsky's money machine were reluctant to talk about it."

Whatever the source of his newfound cash, Mikhail was able to use it to set up an importing business (while the major import was computers, Hoffman says that rumors suggest brandy and stone-washed jeans also factored in). By the early '90s he was virtually the face of Russia's nascent capitalism, with his own bank, Menatep, and the author of a book celebrating money, "The Man with the Ruble" (one key line: "Our guiding light is Profit, acquired in a strictly legal way. Our Lord is His Majesty, Money, for it is only He who can lead us to wealth as the norm in life").

In "Kremlin Rising: Vladimir Putin's Russia And The End Of Revolution," Susan Glasser and Peter Baker write that by the early 1990s, Mikhail had "noticed earlier than many that the future would be in oil," and positioned himself as an informal advisor to Boris Yeltsin's energy minister. He slowly began buying up state assets.

Then, in 1996, the Mentep group bought the majority of shares in energy giant Yukos. The oil company was one of the spoils of the messy and violent period of post-Soviet privatization, where Russia's oligarch generation was created when the rich paid pennies on the dollar in government auctions and the now-notorious "loans for shares" scheme. The profits were huge, and Mikhail was transported from the realm of very rich to mega rich.

Glasser and Baker write that during the 1998 Russian financial crisis, "Khodorkovsky moved to protect himself with a viciousness that would make him enemies for life." His self-protection included defaulting on huge foreign loans, stiffing the banks when they tried to collect collateral, and pushing American investor Kenneth Dart out of Yukos in a complicated shareholder battle.

"When you go back to '99-2000, he didn't have a very good reputation at all," says Fiona Hill, an expert on Russia with the Brookings Institute. "He seemed to be same kind of robber baron as a lot of the other oligarchs. He was heavy-handed and ruthless."

By the early days of Putin's presidency, however, it appears that Mikhail was trying to make Yukos meet the standards of Western companies — and by some accounts his attempts were successful.

"Even though Yukos was conceived in the 'wild East' period of the 1990s," Thor Halvorssen, founder and CEO of the Human Rights Foundation, writes in an email, "by 2000 it had become the most transparent Russian company."

"An awful lot of people were trying to work out if this was all sincere," Hill says. "In a way, he was arrested before he could really prove it."

As part of bringing Yukos up to Western standards, Mikhail had brought in an American CFO, Bruce Misamore, who joined the company in February 2001. Misamore, who had retired from his position at Penns Energy Company, admits that his research led him to conclude that "Mikhail had a bit of a reputation as a bad boy from a shareholder, governance standpoint," but he was still interested.

"The company had brought in a new corporate governance code, and they had engaged several foreign directors, and it appeared that the company was in the midst of a clear turnaround," Misamore said in a recent phone call. "And of course, a big part of this was Russia. Russia seemed to be heading in the right direction under Putin at that point." He felt something had changed at the company, however, and he was excited by the possibilities.

Misamore moved to Moscow for the job. As he puts it, the first couple of years were "fantastic," and Mikhail was the "probably brightest person I had ever met."

"We were the fastest growing oil company in the world. We were turning a Soviet-style company into a far more westernized company, so we were implementing lots of corporate governance things, financial reporting, an investors relations function, a corporate secretary function," Misamore says. "I tried to set things up in terms of governance to be state of the art, and one of the corporate governance goals, the corporate charter goals, that had been established in 2000, was a listing on the NYSE and we were putting everything in place to do that after all the financial reporting and governance. Really, they only thing we hadn't got implemented by 2003 was the Sarbenes Oxley implementation and that was the next step."

The next step was never taken, of course.

Misamore was in his apartment on Oct. 23 when he read Mikhail had been arrested. "It was very surprising," he said. "I thought it was not in the best interests of Putin or the country. As it turns out, of course, I had misread Putin's agenda."

What motivated Mikhail's arrest?

One theory is that Mikhail had grown politically ambitious. In the years before his arrest, he had given tens of millions of dollars to various parties, not just in the capitalist parties Yabloko and Union of Right Forces, but also in the Communist Party and even Putin's United Russia.

In Glasser and Baker's account, one source says Mikhail was trying to get one third of the Duma (Russia's parliament) on his payroll, and turn the country into a parliamentary government — with himself as prime minister, and Putin, or someone else, as a figurehead president. Putin not only felt threatened but also felt that Mikhail had violated an agreement with the oligarchs that they could keep their fortunes if they kept out of politics.

Another theory is that Mikhail's oil company posed a threat to some powerful people.

"He was suddenly changing the way that business was done in Russia," Hill says. "In a way that was really damaging a lot of vested interests all up and down the supply chain." Mikhail was keen to get Yukos up to international standards, and he began to talk publicly about selling a large stake in Yukos to ExxonMobil or Chevron and focusing on public service.

"In his efforts to make Yukos more transparent, he was moving to international suppliers, moving towards a way of doing business that was kind of like an alien virus in the old sclerotic Russian economic system," Hill says. "He didn't want to order piping and other things from old, moribund Soviet enterprises, but that was part of the game."

Putin's government wanted an oil giant, but it had to be one that played by their rules, Hill says.

Pavel says that both political and financial factors played in his father's arrest.

"My father was financing the opposition but it wasn’t a secret,"

My father was financing the opposition but it wasn’t a secret

Pavel says. "Everyone knew that, including Putin, and it was done with very vocal direct authorization from the man himself. However, the second part, the economical trigger was the fact that Igor Sechin, then deputy Prime Minister, now the head of Rosneft, wanted to appropriate the Yukos company."

"Where the two interests were combined was that Putin wanted to obtain enough power both domestically and internationally to try and resurrect the image of Russia as a super nation," Pavel says.

That Yukos was destroyed, at least partly, for corrupt reasons has become accepted history. In 2010, the Economist cited one poll that found 63% of Russians believe the destruction of Yukos was orchestrated in the interests of a small group of bureaucrats and businessmen with close ties to the Kremlin.

Yukos' group's assets remain in legal limbo to this day. It took less than a year for the oil giant, one of the most spectacularly successful companies in the world, to begin bankruptcy proceedings after Mikhail's arrest.

A number of its assets, including the resource-rich Yuganskneftegaz, went up for auction. The only two bidders were Gazprom, a state-oil monopoly, and a company called Baikalfinansgrup, and Gazprom soon had to bow out due to a lack of funds. Writing in Vanity Fair, journalist Masha Gessen points that something about Baikalfinansgrup seemed fishy: For example, its registered address was in the desolate town of Tver, and the office turned out to be an empty space registered to 150 different companies. The company had been registered just a short while before the auction.

Fishier still, the company was loaned $9 billion to buy Yuganskneftegaz by none other than Rosneft, the state oil company. The auction lasted just two minutes, and Rosneft would go on to buy Baikalfinansgrup a few days later. Rosneft would later grow to own a number of other Yukos assets. It is now listed as the world's largest listed oil company by output, according to Reuters.

Even those within the government were a little confused. Andrei Illarionov, the senior economic adviser to Putin,summed it up as the "scam of the year," and that Russia had moved to a "interventionist model of economic development, with dramatic interference from the state." Illarionov resigned a little over a year later and remains a strident Putin critic.

Misamore fled Russia in 2004 during a trip to the country. He was warned he could be arrested if he returned. Since that day he's worked to protect the assets; filing bankruptcy in a U.S. court (which failed), forming two Dutch stichtings to protect Yukos' international assets, and taking the case against Russia to the European Court of Human Rights (it was filed in 2004 but is still in court). The plan is eventually to redistribute what remains of Yukos' assets among its shareholders and creditors and, ideally, seek retribution, Misamore says.

"Russia needs to pay the shareholders. They need to compensate them for stealing the company with a fraudulent case," Misamore says. "Until the recent TNK-BP sale, 75% of Rosneft's value was former Yukos assets. It was a valuable asset that the Russians stole and they need to pay for it."

Putin's role in the arrest of Mikhail and the destruction of Yukos has often seemed personal — Gessen describes the two men as "central to each other's lives."

"Putin doesn't like Mikhail. As a Soviet person, a KGB person, someone who didn't grow up affluent. I think he's jealous of the people who were successful, and also thought that they got their money improperly," Misamore says. Putin is reported to have privately told Lord John Browne, the former head of BP, "I have eaten more dirt than I need to from that man" before his arrest.

Pavel, for his part, thinks this isn't a major factor. "There was another aspect of personal animosity between the two men," he says, "but Putin is a very, very smart individual. I don’t think the personal animosity that existed between them would ever lead to such drastic changes in domestic policy and re-nationalizing whole industries."

Still, many observers have pegged the turning point in Mikhail and Putin's relationship to a meeting in February 2003. The Russian president had invited Mikhail and other oligarchs to the Kremlin, and Mikhail had begun to complain about the sale of a small oil firm to Rosneft for an unusually low price, implying it was a corrupt deal.

Putin, according to numerous reports, turned the conversation to Yukos' own huge assets. "The question is, how did they obtain them?" the Russian president said, barely hiding his anger (the clip above, from Cyril Tuschi's excellent feature length documentary "Khodorkovsky," captures the scene).

Glasser and Baker's account of the meeting notes that the other oligarchs winced. "It was clear to me that we had just signed our own death warrants," Aleksei Kondaurov, head of the Yukos-Moscow management company later told the authors.

"Putin does not take kindly to insults," Hill says. "If you look back at the video of those meetings, you can tell that Khodorkovsky comes out of it knowing that he's stepped over a line."

Indeed, while the arrest later that year was a shock to many, in hindsight it appears that Mikhail was resigned to his fate. Alexander Temerko, a close friend and Yukos colleague of Mikhail's at the time, says he was not surprised by the arrest, "and, actually, it was not a surprise for him either."

Temerko was responsible within Yukos for dealing with Russia's Ministry of the Interior. He says that when Mikhail was traveling to Siberia, his office heard that the general prosecutor wanted to interrogate Mikhail, and that he would probably arrest him if he did not return to Moscow. Temerko says that his advice was to return and talk to the prosecutor, but Mikhail refused, fearing he would be ordered to stay in Moscow if he returned.

When he later heard that Mikhail would probably be arrested, Temerko says he phoned Mikhail again, who told him: "OK, I guess we will say goodbye. Try to save the company and help people: do the best that you can."

Even Misamore, who was shocked by the arrest, admits that in hindsight there were signs that Mikhail was expecting it. The two met in Moscow two weeks before his arrest, and he noticed Mikhail had cut his hair down to a short crop. "I subsequently found out that it appeared he was preparing to go to prison by cutting his hair off," he says.

It was around 8 a.m. on Oct. 25, as Mikhail boarded a private jet in Novosibirsk, ready to return to Moscow after visiting regional Yukos offices that masked men from the successor to the KGB, the FSB, surrounded him and waved automatic rifles in his face. Mikhail was led out in handcuffs and taken onto a different plane and flown to Moscow.

The trial of Mikhail and business partner Platon Lebedev became public spectacles. The pair were kept in a cage in a courtroom. It reportedly measured 47 by 31 by 20 inches. They were kept in Moscow's notorious pre-trial detention centers and escorted to and from court with the type of armed entourage usually reserved for terrorists.

In total, dozens of people have been were arrested on Yukos-related charges. Mikhail and Lebedev's first trial ended in 2005, and the pair were found guilty of fraud and tax evasion and sentenced. In 2011, a second trial found Mikhail and Lebedev guilty of embezzlement and money laundering, effectively convicted of stealing all the oil exported by Yukos between 1999 and 2003.

Even those who had ignored the first trial seemed disturbed by the second — U.S. and European governments criticized the verdict, and Amnesty International called Mikhail a "prisoner of conscience."

"Whatever the rights and wrongs of Mikhail Khodorkovsky and Platon Lebedev’s first convictions there can no longer be any doubt that their second trial was deeply flawed and politically motivated," Nicola Duckworth, Amnesty International’s Director for Europe and Central Asia, said at the time.

Part of that recognition came from the speech Mikhail gave at the closing of the trial, railing against the power of the "siloviki" (the powerful people in Putin's inner circle) and the predictability of his verdict.

"I am not a perfect person, but I am a person with an idea," Mikhail told the court. "For me, as for anybody, it is hard to live in jail, and I do not want to die there. But if I have to, I will. The things I believe in are worth dying for."

"I have never been so moved by the words of a businessman," Joe Nocera wrote for The New York Times.

Despite international recognition, Mikhail remained in Russia's notorious prison system, where he has faced multiple violations, Halvorssen notes, pointing towards the period when Khodorkovsky was placed in solitary confinement for giving a magazine interview, or the four years he spent in Moscow's notorious pre-trial detention centers, even though these centers are no longer used for economic crimes.

"The most horrifying, though, are the stories of Khodorkovsky’s cellmates," Halvorssen adds. "In 2006 one of them was forced to attack Khodorkovsky, and later testified that he was tortured and threatened with murder until agreeing."

Despite his conviction, Mikhail still has power, and the Russian government has been unable to get to most of his overseas assets. "He's built a pretty impressive network, in spite of being incarcerated in very nasty conditions," Hill says.

Pavel says Mikhail was instrumental in his worldview, even though they never saw each other often. He left Russia at the age of 14 to attend boarding school in Switzerland, and he moved to Boston at the age of 18 to attend Babson College. That fall was the last time he saw his father.

It took a while for Pavel to become involved in his Mikhail's case — as he puts it he was "too young, too stupid, and ... didn't understand how long this would take." After Pavel graduated from Babson, he moved to New York City to work for a Russian media company. He credits both his father and his Babson education with inspiring him to start his own business, Enertiv in 2011.

It wasn't until 2006, at the request of his father's lawyer, that he began speaking publicly about the Yukos case. He later decided to continue the work his father had done with the Open Russia Foundation (a group founded in 2001 loosely modeled on the Soros Foundation that had effectively shut down in 2006) and started the IMR in 2009. Pavel says it is funded with his own money and donations.

"The idea was to influence the speed of democratic development back home," Pavel says. "There is no key decision maker, no key trade that would get my father out of jail. The only thing that would help him would be the return to the rule of law and return to democracy back home. It is a very broad goal but this is my motivation."

"Thanks to IMR, Khodorkovsky’s case has not been forgotten, despite the state’s efforts to hide him from the public eye in the most remote Russian colonies," Halvorssen writes.

The foundation is in the process of moving from a broad NGO to a think tank focused on democracy, Pavel says. Much of Pavel's work remains related to his father — he recently accepted a $100,000 human rights award from Lech Walesa on behalf of his father, and the foundation is working with a number of other NGOs to host events for the 10th anniversary of Mikhail's arrest.

While Pavel has a life in New York with Enertiv and a wife and young child, it's clear much of his attention remains back in Russia. He talks to his father over the phone most Saturdays, but Mikhail must split his allocated 15 minutes between various family members.

"Ironically, with my father being in prison, I’m much closer with him now than when I was 14," Pavel says. "I didn’t know what the hell I would be doing in a couple of years, my father had a very clear vision of what he wanted at 40. Now our interests are very much in sync so we feel like we are much closer."

In theory, this could all end next August with Mikhail's release from prison. Even now, however, there are persistent rumors that a third trial is in the works — Der Spiegel reported this week that he may be charged with "being the head of an international network that is allegedly operating against the Russian state."

Pavel, for his part, seems optimistic. He points out that Yukos business partner Lebedev is due to be released on May 2, just a couple of months after the Sochi Winter Olympics. Russia is spending a ridiculous amount of money on the Sochi games, part of a clear push to dispel the persistent talk of corruption and inefficiency that lingers around the country. Putting Lebedev back on trial so quickly after the event would be a seriously bad PR move, and if Lebedev gets out it's likely that Mikhail will too. There's also the possibility of amnesty for those convicted of non-violent crimes, as suggested recently by the Kremlin’s human rights council.

Still, he has learned not to take anything for granted: "I'm not holding my breath," Pavel says.

What would Mikhail do if he is released? Politically, he has been isolated for a decade, and in that decade a lot has changed in Russia. He missed the 2011 Duma election protests that led to large-scale protests in Moscow and other cities, and, while he has corresponded with most of the young opposition movement and seems to be viewed positively, it's not entirely clear if he and, say, Alexey Navalny would work together. Today, the idea of Putinist repression may no longer conjure thoughts of Mikhail Khodorkovsky as much as that of the punk rockers who ended up in jail (Pussy Riot) or the corruption-fighting lawyer who ended up dead (Sergei Magnitsky).

The hope, of course, is that Mikhail's 11 years of prison can be turned into something positive. "I do think that having gone through a prison sentence like this, it must be pretty transformative," Hill says. "He didn't flee, he didn't leave the country. He really is like something out of a 19th century Russian novel. He's suffered and become a martyr."

He really is like something out of a 19th century Russian novel. He's suffered and become a martyr.

Mikhail himself hasn't publicly speculated, but an op-ed he wrote for The New York Times this week demonstrates he remains unafraid to speak his mind. "Today the system for running the country is called 'Vladimir V. Putin,'" he writes, before warning ominously that "Russia runs the risk of seeing another authoritarian regime follow his." Perhaps tellingly, Mikhail mentions Nelson Mandela — another jailed rebel, and one who later went on to head the state that jailed him.

So who knows? Mikhail's friend Temerko says that he hopes the man will take some time off to improve his health and that he doubts Mikhail will go into politics or business again, perhaps instead focusing on the non-profit sphere, in particular education, and spending time with his family.

"I don’t know what he will do," Pavel says. "I know what I will do. I will try to get him out of Russia as soon as possible because he needs to rest. He needs to do time with his family. We all haven’t seen him in a while. His parents are not feeling that well, my grandparents. We’ll need to be a lot of catch-up will need to be done."

Pavel's perspective on Russia itself seems despondent. "I don’t think he’ll get into politics because 'A,' he would risk a third conviction right away and 'B,' it seems like the society is not prepared, regardless of who is at the helm of the opposition," Pavel adds. "It just seems like the society overall is not yet there."

"Many times Khodorkovsky repeated that he intends to stay in Russia after his release," Halvorssen writes. "I don’t know whether he intends to ever run for office, but it is pretty clear to me that this man has, is, and will likely continue to shape Russian politics."

In short, no one knows what will happen, but people across Russia are wondering. After all, Mikhail's life has in some ways embodied the progress of Russia, from the Soviet era, to Soviet experiments with capitalism, to an oil money oligarchy, to a Russia dominated by Putin. The question is what comes next.

As for Pavel — a man for whom much of life revolves around a country he left when he was 14 — could he return? "No," Pavel says, laughing. "Very simple answer, no. It would take the entire country to change."